Google Reveals Margins On AdSense Tightening

Strong Competition Forcing Margins Down

martinibuster

In a mistaken disclosure to investors, Google accidentally advised [mercurynews.com] that it's profit margins from it's AdSense program were getting squeezed.

the notes also pointed out that strong competition was squeezing margins for its AdSense syndication network.

In a statement filed Tuesday afternoon with the Securities and Exchange Commission, Google said the notes "were not created for financial planning purposes, and should not be regarded as financial guidance."

[edited by: martinibuster at 5:41 am (utc) on Mar. 8, 2006]

maxgoldie

11:55 pm on Mar 7, 2006 (gmt 0)

So...in other words..bad things usually run downhill.

universetoday

11:58 pm on Mar 7, 2006 (gmt 0)

I think they're just anticipating competition from MSN, Yahoo, etc. And competition is good for publishers.

jomaxx

12:02 am on Mar 8, 2006 (gmt 0)

bad things usually run downhill

I don't understand what that expression means in this context, but squeezing margins should be a good thing for publishers. The margin is (loosely speaking) the difference between what advertisers pay and what publishers receive.

guru5571

12:12 am on Mar 8, 2006 (gmt 0)

Bad things may run downhill, but that has nothing to do with this. I predicted this a few months ago in the thread about what people thought they would see for Google in 2006. This is a good thing and market pressure will make it inevitable. This is a good thing!

JoeS

12:17 am on Mar 8, 2006 (gmt 0)

The bad thing is the competition could mean lower prices for keyword advertising overall with more inventory available.

While this would be good for businesses that advertise online, publishers could see their earnings fall.

driris

12:25 am on Mar 8, 2006 (gmt 0)

thats not good news for publishers...

EdisonCarter

12:26 am on Mar 8, 2006 (gmt 0)

It doesn't say revenues are falling, it says margins are tightening. That is good for publishers.

Revenues are how much they sell the ads for. A major component of the cost is what they pay the publishers.

If revenues are holding (or increasing) and other expenses are holding, then the only way margins would thin is if Google is paying publishers more.

Big if, there are other expenses other than paying the publishers, it is always possible that these costs are going up and eating into the margins.

ec

clickme

12:36 am on Mar 8, 2006 (gmt 0)

With the new competition, don't you think that Google would try and keep its existing ad base with higher earnings? Simply put, its the only way Google will keep people like us from running to the competition.

jomaxx

12:53 am on Mar 8, 2006 (gmt 0)

FWIW, not to badmouth Google or anything but I think the real meaning of their statement is that competition will make it harder to increase their margins in the future.

I kind of doubt that AdSense margins have actually gotten smaller, although it's possible they are facing tougher negotiations when dealing with premium publishers.

europeforvisitors

1:02 am on Mar 8, 2006 (gmt 0)

With the new competition, don't you think that Google would try and keep its existing ad base with higher earnings? Simply put, its the only way Google will keep people like us from running to the competition.

It isn't that simple, due to different bids on different keywords on different networks, geotargeting, where publishers are located, etc. One publisher might make more from AdSense while another might make more from YPN or MSN with the same traffic.

Andrew Bassett

1:07 am on Mar 8, 2006 (gmt 0)

When a TV network feels the squeeze, who benefits? The producers? The sponsors?

universetoday

2:49 am on Mar 8, 2006 (gmt 0)

It's not the same thing. We're the TV networks, and Google represents the advertisers.

tonyolm

3:17 am on Mar 8, 2006 (gmt 0)

AND if my websites are good for google they will be good for the competitors. YOu want your ads on my site? you are going to pay me more than what google gives me. Or offer me something that google doesn't.

It's good for publishers... If the competitors can't thier ads on the producing websites they won't have anything to sell to thier advertisers.

Andrew Bassett

3:44 am on Mar 8, 2006 (gmt 0)

It's not the same thing. We're the TV networks, and Google represents the advertisers.

Umm, no.

We're the producers, Google is the TV network (paying us for showing commercials), and the advertisers are the sponsors.

And the question remains. When the middleman feels the heat, which of the outermen benefit? Both of them?

dollarshort

4:08 am on Mar 8, 2006 (gmt 0)

It should all even out, as publishers leave, more pie for us, but advertisers have the option to leave thus bringing down the bids. I do not think G will take a bigger chunk as they do not want to trigger a mass exodus of publisher.

andrea99

4:15 am on Mar 8, 2006 (gmt 0)

Competition benefits everyone in the long term--except our competitors in broadcast and print. Competition keeps the PPC market efficient and effective for advertisers meaning they will allocate more of their future ad budgets to PPC, less for TV, Radio and print.

Transient price waves may come and go quickly but the overall tide is rising for the forseeable future.

Rejoice publishers! :)

guru5571

5:32 am on Mar 8, 2006 (gmt 0)

Well said andrea. I wish a few more people in here would think like an economist when it comes to these threads.

percentages

5:47 am on Mar 8, 2006 (gmt 0)

>Rejoice publishers!

I agree, this "should" be good for publishers.

Of course you can squeeze the "middleman" too much and he will die. But, I don't think G is even close to that today.....so squeeze away ;)

martinibuster

The statement further included that... the company would execute well on its core ads projects to exceed the $9.5 billion target (and backfill any AdSense partner loss) and drive advertiser satisfaction.

...These statements were termed as speaker notes prepared early in the fourth quarter of 2005 for an internal product strategy presentation... In addition, the statement with respect to AdSense margins did not reflect Google's current expectations, the company stated.

europeforvisitors

6:59 am on Mar 8, 2006 (gmt 0)

AND if my websites are good for google they will be good for the competitors.

Again, it isn't that simple. Where is your audience located? Where are your advertisers located? Does the competitor have enough advertisers for the keywords that an adbot detects on your pages?

Consider YPN:

Some AdSense publishers have reported great results; others have expressed disappointment. And others haven't been able to enroll in YPN because they're in countries that YPN doesn't yet serve.

toldan

7:18 am on Mar 8, 2006 (gmt 0)

In a mistaken disclosure to investors, Google accidentally advised that it's profit margins from it's AdSense program were getting squeezed.

What does that mean? Don't you see it guys? Google is going to squeze more money OUT of Adsense publishers, meaning: you were paid $.70 or every $1 advertisers spent on Adwords; now, you will be paid $.30 for every $1 advertiser spends on Adwords.

It's the only way for Google to keep it's stock high!

percentages

7:28 am on Mar 8, 2006 (gmt 0)

>you were paid $.70 or every $1 advertisers spent on Adwords; now, you will be paid $.30 for every $1 advertiser spends on Adwords.

>It's the only way for Google to keep it's stock high!

No! If they reduce the payout % I will know. My conversion rate is 100% consistent, I can see their pay rate by using their own tools, so if my payments drop it has to mean that they have cut my %.

If they do that I will ditch them! And will never return because they acted dishonestly, even if they try to correct it later.

Google isn't the best converter today, but it is a good "filler". If it wants to screw with the % payout it will lose my business forever! I would rather help smaller enterprises that appreciate the possible growth!

Even if it means a lower initial income for me.

jomaxx

7:42 am on Mar 8, 2006 (gmt 0)

Toldan, your explanation is the exact opposite of the meaning of the words you quoted. "Squeezed" means Google's profit margin will get smaller.

martinibuster

8:11 am on Mar 8, 2006 (gmt 0)

"Squeezed" means Google's profit margin will get smaller.

I agree. I see this as Google standing by their publishers to keep them from bolting to the competition, even if they have to squeeze their margins.

If that's true, it's good to be valued. :)

guru5571

8:30 am on Mar 8, 2006 (gmt 0)

Toldan, G will be squeezed because they have to continue to give a good payout. If G does not deliver a good payout, then they will erode their publisher base by driving publishers into the arms of outfits like Y!. People will go to the broker with the best payout. G and competitors all have to have a large inventory of content available to get good ad placement across the board. If they don't have adequate inventory from publishers then the advertisers will go to where they can get it. Google and competitors will continue to have margins squeezed to the rate of traditional ad agencies. That said, it will still be highly profitable and they will take ad $$$ from traditional media and traditional ad agencies as more ad revenue moves online.

To reiterate. G can't raise ad rates either, because that will drive advertisers to places like Y!. This is how G gets squeezed. Like I said it will still be highly profitable, but they are the broker that will be squeezed between buyers and sellers with multiple choices for someone to buy and sell ads and adspace.

At the end of the day they are an adbroker with some fancy technology to take costly human labor out of the equation. So they are generally more efficient than their competitors... for the time being. All they do is connect buyers (advertisers) with sellers (publishers).

Pretty straight forward really.

jetteroheller

9:29 am on Mar 8, 2006 (gmt 0)

negotiations when dealing with premium publishers.

Most premium publishers which I know have web sites not optimal for AdSense.

For example sites from big paper newspapers. There is a news about something and AdSense tries to bring ads matching the news.

All this newspapers which are premium publishers, easy to see by different ad sizes have in common:

Ads not optimal placed No filter applied, Ebay tries to sell everything including the Vatican. No AdLinks

So I think this premium publishers have a terrible eCPM. But usual when I look on the advertising price lists, this sort of site are by my oppinion complete over paid for showing banners and pop ups.

So I can imagine, that there is a price competition on this market.

But I can not imagine a competition at specialised web sites with high eCPM.

John Carpenter

12:12 pm on Mar 8, 2006 (gmt 0)

Umm, no. We're the producers, Google is the TV network (paying us for showing commercials), and the advertisers are the sponsors.

Actually, publishers own and control the "TV networks", not Google. Publishers decide if they want commercials or not. If they do, they hire Google (or Yahoo, etc.) to find advertisers who want to have their commercials shown on their TV networks (websites). Google -- the middleman -- also decides which ads they offer to the TV network. Owners of the TV network (publishers) pay Google for their job in the form of commissions.

Google is only the mediator. You could as well decide not to use Google's services and instead negotiate directly with potential advertisers.

spacetaxi

1:06 pm on Mar 8, 2006 (gmt 0)

I think a key issue with regard to competition between contextual advertising networks is that, to my knowledge, none of the big ones (adsense, ypn) actually disclose the payout percentage to the site owner. At some point, one of these players will probably reveal this, which will spur the others to disclose as well, and this will be better for publishers. However, resulting competition would hurt the ad networks margins.

The next arguement would be the reach and effectiveness of the different ad networks would also need to be considered by publishers, and I would expect that the ad networks will also reveal more details about this as well, which will also benefit publishers.

Thanks,

SpaceTaxi

europeforvisitors

2:50 pm on Mar 8, 2006 (gmt 0)

Spacetaxi, knowing the percentage payout is of no real importance to publishers, and knowing or not knowing the geographic reach isn't a dealbreaker, either. Why? Because publishers can test and see which network provides the greatest eCPM and total earnings. The proof isn't in the percentage, but in the pudding.